Diesel Flow To Europe To Cap Winter Price Surge: Energy Markets

Indian IT outsourcers want a bigger byte out of Europe

Because the markets used to be isolated, the lack of links between neighbouring countries makes it difficult to tackle situations of over or undersupply, which if properly handled, could lead to lower energy prices for industry. Fifteen national markets will from November 26 be able to use interconnectors across borders more effectively once so-called market coupling starts in the North-Western Europe (NWE) market region. It will allow traders to buy and sell available power capacity more easily across borders and according to supply and demand pricing signals. “The harmonisation of trading rules is one of the core tasks for the creation of an efficient pan-European power market,” said Jean-Francois Conil-Lacoste, chairman of Paris-based EPEX Spot, one of four exchanges in the project. Norwegian grid firm Statnett issued figures showing NWE will account for 2,300 terawatt hours (TWh) per year compared with total European consumption of around 3,200 TWh. The NWE initiative was originally made up of France, Germany/Austria and the Benelux countries (Belgium, Netherlands, Luxembourg), but has been widened to Britain, the Nordic countries (Denmark, Sweden, Norway and Finland), the Baltics (Lithuania, Latvia and Estonia), as well as Poland. Apart from power exchanges, the move also includes 13 transmission system operators (TSOs) and their cross border power links, working together by agreeing a central formula to combine trading and the transport of electricity. While much of continental Europe is set to benefit broadly from the move, analysts say Britain – which is linked to the Netherlands and France by cable – stands less to gain. “Price differentials will likely remain in place because Britain is quite isolated and there is little scope to fill the cables even more,” said Peter Osbaldstone, analyst at energy research and consultancy Wood Mackenzie. British wholesale power prices are 5-10 euros per megawatt hour (MWh) above those in the Netherlands because of the UK’s higher exposure to expensive gas generation and limited interconnector capacity. PUZZLE COMES TOGETHER Market coupling mandates that capacities are used efficiently so that supply and demand fundamentals can rule across different national power markets, enabling traders to work under a joint set of rules. “Market participants trading on a power exchange will… benefit from broader offer and demand across borders,” said Wolfram Vogel, spokesman for EPEX Spot. This means that exchange prices emerging from the process will see a higher price convergence across Europe, making the market more efficient and liquid, and reducing costs for industries operating across Europe.

The imports will prevent any repetition of shortages that caused prices to jump in the past two winters, even as Europes refiners cut output, according to all but one of nine executives surveyed by Bloomberg. The increased shipments show how Europes waning refining operations are leaving it more dependent on companies such as Indias Reliance Industries Ltd. (RIL) and Valero Energy Corp. ( VLO:US ) of the U.S. for a fuel that powers 55 percent of the regions vehicles. Curbed prices also stand to hurt profit at refiners from Saras SpA (SRS) of Italy to Spains Repsol SA (REP), while helping consumers. Europe will be able to draw quite heavily on higher volumes of diesel from the Asia-Pacific in the coming months, Sabine Schels, a commodity strategist at Bank of America Corp. in London, said by phone Oct. 4. With fewer diesel barrels demanded at home, a lot of these Asian countries, including India, have already boosted exports. Winter Peaks The premium paid for diesel barges over the ICE Futures Europe gasoil contract soared during the past two winter seasons, climbing as high as $64 a metric ton more than the benchmark in October 2011 and November last year, according to data compiled by Bloomberg. It was about $26 on Oct. 7, equating to an outright price of $951.75 a ton, the data show. Profits from converting crude into diesel, as approximated by the crack spread between gasoil and Brent crude futures, will stay near current levels this winter, or about 30 percent below the previous seasons peak, five of the refining executives in the Bloomberg survey said.

“To a certain extent, the skills shortage in continental Europe is driving the growth for offshore openness,” said Katharina Grimme, a principal consultant with outsourcing advisory Pierre Audoin Consultants (PAC) in Cologne, Germany. LOCAL CHALLENGES Indian IT’s progress in Europe comes at the expense of local vendors, which according to NelsonHall are seeing flat sales. In 2009, India’s TCS ranked just 21st in IT services revenue from Europe, the Middle East and Africa, but rose to 11th at the end of 2012, according to PAC. Indian rivals Wipro WIPR.N and Infosys ranked 18 and 23, respectively, in 2012, after not cracking the top 25 in 2009. To address labour issues and speed growth in Europe, Indian companies have been acquiring local firms. To win client trust, they hire locally for senior client-facing roles, but most of the grunt work can be done from India. Jef Loos, head of sourcing research at Whitelane Research in Brussels, said Indian vendors moving into Germany, France, Spain and Italy will use acquisitions given language barriers, a “limited” outsourcing culture, and stronger unions. Works councils are “very” influential in markets such as Germany and France, said Tech Mahindra’s Sharat Kumar, which is reflected in the makeup of project staff. In Germany, for example, relationship management staff tend to include Germans. “We’ll have enough mix to give them the comfort and at the same time to take care of the critical activity that we need to do onsite,” he said. Indian IT firms are also hamstrung because India does not yet have EU “data adequacy” status. That requires, among other things, that India has a single point of contact, such as a privacy commissioner, that upholds individuals’ right to privacy, according to Kamlesh Bajaj, chief executive of the Data Security Council of India, which is backed by the Indian IT industry’s main lobby group. While the impact of the EU requirement is impossible to measure, Bajaj said a March survey of Indian IT vendors by the Data Security Council found that the industry could have earned an additional $7 billion in annual revenue with the increased outsourcing to India that the “data adequacy” status would have facilitated.